Two years and more than $2 billion after Microsoft bought its way into the business-applications market, the company's Business Solutions division is a money loser. Yet, Microsoft officials remain doggedly upbeat about the direction of a unit that increasingly will compete with Oracle, PeopleSoft, and SAP in a software sector that's been dragging. Why? The answer involves a little-known initiative called Project Green.

As Microsoft looks for avenues of growth beyond its maturing Windows and Office lines, business applications may represent one of its best opportunities. Senior VP Orlando Ayala was recently quoted in The New York Times as saying that run-your-company applications could become a $10 billion business for Microsoft. Business Solutions, the Microsoft unit that sells business applications, generated $567 million in revenue in fiscal 2003, an 84% increase over the previous year. The jump reflects last year's acquisition of European software company Navision.

A large and growing percentage of Business Solution's developers are quietly working on a suite of enterprise applications intended to integrate tightly with Microsoft's next-generation desktop and server software. Project Green is "very ambitious," says Paul Hamerman, a Giga Information Group analyst. "They've crafted a strategy to integrate the entire Microsoft stack, from back-end systems and operating systems to the Office applications."

To some, the whole undertaking may seem counterintuitive. Why write new financial, human-resources, distribution, and other enterprise-resource-planning modules when Microsoft already has four suites of applications that support many of the same functions? That's right. When Microsoft purchased Great Plains in 2001, it also got the applications of Solomon Software, a company Great Plains bought earlier. And when Microsoft acquired Navision last year, the deal included ERP software from Axapta, which Navision had previously snapped up. The result: Microsoft found itself with four sets of business applications to sell--and support.

Business Solutions officials promise they'll continue enhancing the acquired suites for years to come. Already this year, the division has introduced upgrades to the Great Plains, Navision, and Solomon applications. In parallel, though, there's Project Green, an effort that involves about 40% of Business Solutions' 1,700 programmers, says Satya Nadella, the division's corporate VP of product development. By the middle of next year, Nadella says, two-thirds of Business Solutions' developers will be concentrated on new products, with about a third pumping new features into the existing apps.

A product road map released earlier this year calls for the Green applications to begin appearing in 2005, but that date could slip because the apps are being developed in parallel with Microsoft's next-generation operating system, known as Longhorn. "Think of us as being aligned with Longhorn," Nadella says. Microsoft hasn't given a target date for Longhorn, but some analysts have speculated it won't arrive until 2006. In the meantime, Microsoft is working on technologies related to the Green applications.

The rationale for Project Green is that, in order to get the kind of deep and wide integration that increasingly defines all Microsoft software, the company had to write applications using its own programming languages, development tools, and APIs. Originally developed outside of Microsoft, the Axapta, Great Plains, Navision, and Solomon applications were written in a variety of languages using different programming tools, and they run on disparate operating systems and databases.

Closely related to Project Green--think of it as an early deliverable--is Microsoft's customer-relationship-management application, called Microsoft CRM and released in January. Customers can expect more applications like it, created using Visual Studio .Net and with close ties to Windows, Microsoft's SQL Server database, and the Office desktop applications.

New middleware and server products coming from Business Solutions serve the dual purpose of being foundation technologies for the Green applications, while adding Microsoft-developed capabilities to the Axapta, Great Plains, Navision, and Solomon applications. One example: the Microsoft Business Network, server software for sharing purchase orders, invoices, and shipping and payment information between companies. Business Solutions will disclose availability of the new product, intended for small and medium-sized companies, at Microsoft's Worldwide Partner Conference in October.

A linchpin of Project Green is the Business Framework, middleware for connecting applications with Microsoft's operating systems and server software. The Framework will handle object mapping, forms rendering, metadata descriptions, metadata services, and other core functions so that Business Solutions programmers and independent software vendors don't have to do that work themselves. "To build a very rich ecosystem, you need this fundamental service infrastructure," Nadella says. In July, Microsoft moved the 200-person development team working on Business Framework from Business Solutions to its developer and platforms division, a move intended to "mainstream" the framework within Microsoft's product line.

Kevin Lehoullier, a Microsoft customer, likes what he hears about Project Green. Lehoullier is the CIO and CFO of Arthur Schuman Inc., an importer of hard Italian cheeses, which has been using Great Plains' accounts receivable, general ledger, inventory management, and other modules since mid-2001. Those applications have helped speed inventory turns of the company's products, which are stored in a 60,000-square-foot refrigerator in New Jersey. While happy with the Great Plains applications he's using today, Lehoullier sees potential in eventually migrating to the Green applications. "You would expect there to be additional functionality and benefits from the next generation," he says. "When they're all tightly integrated, it's much better."

Not all Microsoft customers, however, are even aware a new ERP suite is in the works. "I'm not familiar with it," admits Michael Forte, director of strategic information systems with Giant Bicycles Inc., the U.S. sales and distribution arm of Giant Manufacturing Co., a company with global operations that began using Axapta's sales applications earlier this year.

The Green applications are not on Forte's radar screen, but an upcoming project could change that. Giant Bicycles plans to implement Axapta's CRM module, and Forte says it's possible Giant will transition to Microsoft CRM if that product becomes part of the Axapta suite. "We expect that to come down the pike shortly," he says. Microsoft officials say the company has no intention of forcing businesses to move from the older application suites to Green, but it's easy to see why customers like Giant might do it anyway. "It sounds like the direction they're moving matches the direction we're heading," Forte says.

For the current fiscal year, Microsoft has set a revenue target of between $700 million and $750 million for Business Solutions, which, if attained, would represent a growth rate of up to 32%. "Business Solutions has an aggressive plan," CFO John Connors said at a meeting with financial analysts in July. Even with that growth, however, Business Solutions won't be profitable this year, Microsoft officials say. That will have to wait until fiscal 2005.

The focus of all this activity is small and medium-sized businesses, which Business Solutions senior VP Doug Burgum describes as "one of the last really fragmented markets in software." But there's also an "if the app fits, use it" philosophy when it comes to larger companies. "Everybody wants some kind of black-and-white answer," CEO Steve Ballmer said at the July analysts briefing when asked about Business Solutions' target market. "Our design center starts at small and midsize companies, but we're going to sell to as big companies as can productively use it."

Most of the work is still ahead in Microsoft's ambitious plan, and large, established competitors won't be easily dislodged. But with hundreds of developers at work, an enviable reseller channel at the ready, and billions of dollars to be made, it's no wonder that when Microsoft officials think about the future of business applications, the word that comes to mind is green.